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3. (TCO D) Absolute Leasing, Inc. agrees tolease equipment to Allen, Inc. on January 1, 2012. They agree onthe followingterms:
1) The normal selling price of the equipment is $1,500,000 and thecost of the asset to Absolute Leasing, Inc. was$1,350,000.
2) At the end of the lease, the equipment will revert to AbsoluteLeasing, Inc. and have an unguaranteed residual value of $100,000.Their implicit interest rate is10%.
3) The lease is noncancelable with no renewal option. The leaseterm is 10 years (the same as the estimated economiclife).
4) Absolute Leasing, Inc. incurred costs of $9,000 in negotiatingand closing the lease. There are no uncertainties regardingadditional costs yet to be incurred and the collectability of thelease payments is reasonablypredictable.
5) The lease begins on January 1, 2012 and payments will be inequal annualinstallments.
6) Allen will pay all maintenance, insurance, and tax costsdirectly and annual payments of $140,000 on January 1 of eachyear.

Required:
a) Determine what type of lease this would be for the lessee andcalculate the initial obligation.
b) Prepare Allen, Inc.'s amortization schedule for the leaseterms.
c) Prepare all the journal entries for Allen, Inc. for 2012. Assumea calendar year fiscal year.

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019

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Problem 1:

On January 1, 2016, Carmona Company enters into a noncancelablelease, with no renewal option, to lease a new piece of equipmentfrom Jackson Leasing Company. The lease term is for three years andthe lease payments are made on December 31 of each year.

The equipment cost Jackson $250,000, it has a fair value of$300,000 and a useful life of four years with no residual value.The equipment reverts to Jackson upon termination of the lease.Carmona guarantees a $100,000 residual value at the end of thelease term.

Both Carmona Company and Jackson Company depreciate allmachinery that they own on a straight-line basis. Carmona’sincremental borrowing rate is 8 percent per year and CarmonaCompany does not have knowledge of the 5 percent implicit rate usedby Jackson.

Collectability of the future lease payments is reasonablypredictable, and no additional costs related to the lease areexpected.

Required:

Determine the annual lease payments, as set by the lessor.

2.Determine the amount of the minimum lease paymentsthat will be capitalized by the lessee.

What type of lease is this to Carmona Company? Be specific injustifying your answer.

What type of lease is this to Jackson Company? Be specific injustifying your answer.

Prepare any necessary journal entries on January 1, 2016, forboth parties.

Prepare any necessary journal entries on December 31, 2106 forboth parties.

Which party will depreciate the asset? What is the amount ofdepreciation expense that will be recognized by that party? Be sureto show all calculations.

How would your answer change if the residual value wereunguaranteed? (You just need to provide a narrative explanation ofits impact on both parties. I am not looking forcalculations with the new assumptions).

Problem 2

On January 1, 2016, Gowdy Company entered into an agreement tolease a piece of machinery from Reyes Corporation for four years.The machinery had a cost and fair value of $800,000 and a usefullife of seven years. The lease called for annual rental payments onDecember 31 of each year, starting on December 31, 2016. At the endof the lease term, Gowdy has the option to purchase the equipmentfor $30,000, which is significantly less than what the fair marketvalue of the equipment will be at that time.

Gowdy’s incremental borrowing rate is 10% and Reyes’s implicitborrowing rate is 8%. Gowdy is unaware of Reyes’s implicitrate.

Collectability of the future lease payments is reasonablypredictable, and no additional costs related to the lease areexpected.

Required:

What type of lease is this for Reyes? (Be specific and providejustification)

What type of lease is this for Gowdy?

Determine the annual lease payments, as set by ReyesCorporation.

Determine the minimum lease payments, as calculated byGowdy.

Prepare the entry on the date of the lease inception for boththe lessee and lessor.

Prepare the lessee’s amortization schedule for the term of thelease.

Prepare the entry for the first interest payment for both thelessee and lessor.

Prepare the entry to record depreciation expense for the assetfor the year 2017, assuming that Gowdy uses the straight-linemethod.

Complete parts 3-6, assuming that the lease payments are madeeach January 1, starting on January 1, 2016 instead of on December31st of each year.

On January 1, 2016, Breshing Company enters into a noncancelable lease, with no renewal option, to lease a new piece of equipment from Edwards Leasing Company. The lease term is for three years and the lease payments are made on December 31 of each year.

The equipment cost Edwards $250,000, it has a fair value of $300,000 and a useful life of four years with no residual value. The equipment reverts to Edwards upon termination of the lease. Breshing guarantees a $100,000 residual value at the end of the lease term.

Both Breshing Company and Edwards Company depreciate all machinery that they own on a straight-line basis. Breshing’s incremental borrowing rate is 8 percent per year and Breshing Company does not have knowledge of the 5 percent implicit rate used by Edwards.

Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.

Required:

1.Determine the annual lease payments, as set by the lessor.

2.Determine the amount of the minimum lease payments that will be capitalized by the lessee.

3.What type of lease is this to Breshing Company? Be specific in justifying your answer.

4.What type of lease is this to Edwards Company? Be specific in justifying your answer.

5.Prepare any necessary journal entries on January 1, 2016, for both parties.

6.Prepare any necessary journal entries on December 31, 2106 for both parties.

7.Which party will depreciate the asset? What is the amount of depreciation expense that will be recognized by that party?Be sure to show all calculations.

8.How would your answer change if the residual value were unguaranteed? (You just need to provide a narrative explanation of its impact on both parties. I am not looking for calculations with the new assumptions).

Please show all your calculations, thanks.

Laura Leasing Company signs an agreement on January 1, 2017, tolease equipment to Nash Company. The following information relatesto this agreement.

The term of the noncancelable lease is 5 years with no renewaloption. The equipment has an estimated economic life of 5years.
2. The fair value of the asset at January 1, 2017, is$79,300.
3. The asset will revert to the lessor at the end of the leaseterm, at which time the asset is expected to have a residual valueof $7,300, none of which is guaranteed.
4. Nash Company assumes direct responsibility for all executorycosts, which include the following annual amounts: (1) $940 toRocky Mountain Insurance Company for insurance and (2) $1,490 toLaclede County for property taxes.
5. The agreement requires equal annual rental payments of$17,930.41 to the lessor, beginning on January 1, 2017.
6. The lessee’s incremental borrowing rate is 12%. The lessor’simplicit rate is 10% and is known to the lessee.
7. Nash Company uses the straight-line depreciation method for allequipment.
8.Prepare an amortization schedule that would be suitable forthe lessee for the lease term. (Round present valuefactor calculations to 5 decimal places, e.g. 1.25124 and Roundanswers to 2 decimal places, e.g. 15.25.)

Prepare all of the journal entries for the lessee for 2017 and2018 to record the lease agreement, the lease payments, and allexpenses related to this lease. Assume the lessee’s annualaccounting period ends on December 31. (Credit accounttitles are automatically indented when amount is entered. Do notindent manually. If no entry is required, select "No Entry" for theaccount titles and enter 0 for the amounts. Round answers to 2decimal places, e.g. 15.25.)

Nash uses reversing entries when appropriate.

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